19.4.2.5 Cost-effectiveness analysis

Cost-effectiveness analysis involves determining cost-minimising policy strategies that are compatible with pre-defined probabilistic or deterministic constraints on future climate change or its impacts. Comparison of cost-minimal strategies for alternative climate constraints has been applied to explore the trade-offs between climate change impacts and the associated cost of emissions mitigation (e.g., Keller et al., 2004; McInerney and Keller, 2006). The reductions in greenhouse-gas emissions determined by cost-effectiveness analyses incorporating such constraints are typically much larger than those suggested by most earlier cost–benefit analyses, which often do not consider the key vulnerabilities underlying such constraints in their damage functions. In addition, cost–benefit analysis assumes perfect substitutability between all costs and benefits of a policy strategy, whereas the hard constraints in a cost-effectiveness analysis do not allow for such substitution.

Some cost-effectiveness (as well as cost–benefit) analyses have explored sequential decision strategies in combination with the avoidance of key vulnerabilities or thresholds for global temperature change. These strategies allow for the resolution of key uncertainties in the future through additional observations and/or improved modelling. The quantitative results of these analyses cannot carry high confidence, as most studies represent uncertain parameters by two to three discrete values only and/or employ rather arbitrary assumptions about learning (e.g., Hammitt et al., 1992; Keller et al., 2004; Yohe et al., 2004). In a systematic analysis, Webster et al. (2003) finds that the ability to learn about damages from climate change and costs of reducing greenhouse gas emissions in the future can lead to either less restrictive or more restrictive policies today. All studies report the opinions of their authors to be that the scientific uncertainty by itself does not provide justification for doing nothing today to mitigate potential climate damages.